Against the Grain

This story is about the aftermath of last year's failed US takeover of East Coast grain handler GrainCorp.

The Federal Government's decision to reject the takeover bid of US giant Archer Daniels Midland took many by surprise. Some growers, particularly on the East Coast, were delighted, while others warned the decision could scare off badly-needed foreign investment.

However, everyone agrees our grain handling infrastructure is ageing, inefficient and badly in need of an overhaul. So now ADM is out of the picture, where will this investment come from?

Here's Chris Clark.

CHRIS CLARK, REPORTER: Every year, millions of tonnes of grain must find its way from the dry plains of the interior to the ports dotted around the coastline. And most of it will make the journey by rail. But Australia's grain trains are smaller, slower and more expensive than our international competitors.

DAN COOPER, NSW FARMERS: The lack of investment is leading to inefficiencies, which always leads to less dollars in growers' pockets. So, I think a long-term solution is some serious investment in rail.

CHRIS CLARK: In an industry where grain growers are often at odds with grain traders, there is at least agreement that rail isn't working as it should.

ALAN WINNEY, EMERALD GRAIN: It doesn't work particularly well. The main lines where you can get speed in some of the trains work reasonably well. The branch lines are far too slow. There's been not enough infrastructure investment.

CHRIS CLARK: What's harder to find is a solution.

ROSS JOHNS, VICTORIAN GRAIN GROWER: Rail's very, very difficult. We've had a system historically that's been established for 100-120 years. If I was constructing a rail system today to service the grain industry, would I construct the system we have today? Probably the answer to that would be no.

CHRIS CLARK: US-based Archer Daniels Midland recognised the need for spending on rail, offering a $200 million rail investment sweetener as part of its failed takeover bid for GrainCorp. GrainCorp can't find that sort of money just for rail.

DON TAYLOR, CHAIRMAN, GRAINCOR We're going through the process at the moment in terms of looking at improving and strengthening our network, but certainly we don't have the capacity to inject that amount of money into it. We haven't actually come up with a number at the moment, but certainly it won't be of that order.

CHRIS CLARK: So why did farmer groups campaign so heavily against the takeover?

But Dan Cooper, ADM GrainCorp was offering an extra $200 million to invest in upcountry infrastructure and rail. Why wasn't that good enough?

DAN COOPER: Our concern was in the extra $200 million that was put on the table at the 11th hour was that it would have been invested in - it was termed as rail-related investment, but at no stage was ADM able to give us any specifics in how growers would benefit from that investment.

CHRIS CLARK: Farmers have won a political battle over GrainCorp's future. What's harder to gauge is the price of victory.

DON TAYLOR: Obviously our shareholders were significantly affected in terms of value and also I think our farmers in the sense that the capital that was offered by ADM to be put into the network redevelopment, that's no longer available. So, they would be the two biggest losers.

CHRIS CLARK: The problem with rail depends a bit on where you are. In Western Australia, the dominant bulk handler CBH is invested in new rolling stock. Its trains are bigger and often faster to port than trains on the East Coast.

Chris Carter works for AEGIC, an industry body which focuses on Australia's grain exports. They've been analysing what it costs to get grain from a farm onto a ship.

CHRIS CARTER, AEGIC: On the West Coast we're looking around $60 per tonne, on the East Coast we're looking at around about $70 per tonne to get the grain onto the ship. So that's including all the storage and handling fees and the freight costs and also the port costs.

CHRIS CLARK: Growers have almost no control over these charges. But because grain prices are set in global markets, all these costs work themselves back to the price the farmer gets. So they are, in effect, another expense for growers, and on AEGIC's analysis, they're often the biggest single expense, more than fertiliser, more than fuel.

CHRIS CARTER: Of course this cost is going to vary depending on the yields of the crop and depending on the distance from the farm to port. And it's also going to vary depending on the region that you are in Australia. So it's a highly variable figure, but a 30 per cent figure is a rough estimate of the supply chain costs compared to the production costs of grain.

CHRIS CLARK: The problem's most acute on the East Coast, where about half the grain harvest is usually sold domestically and where shipping costs to major markets are higher than the west.

CHRIS CARTER: So when it get to Eastern Australia where there's a larger domestic market, we're finding that grain can go in multiple directions, which is obviously going to diminish the efficiency of that infrastructure in terms of getting grain into the ports.

CHRIS CLARK: Australia's East Coast grain rail network's extensive and some of its problems stem from its history. Private enterprise now largely runs the network on lines that are still state-owned, but which governments have shown little desire to maintain or upgrade.

This is Merriwagga in the Northern Riverina, home of the Black Stump pub and one of GrainCorp's 280 or so storage and handling sites across Eastern Australia. And it's a useful illustration of some of the common problems bedevilling the rail system.

So out here on this branch line where the track is only small gauge, it means that the train they're loading today will be somewhere between 10 and 15 per cent below its maximum capacity and when it does get going it'll be restricted to 20 kilometres an hour for the first part of the journey.

The weight and speed limits on the small-gauge track mean each wagon can only be part-filled. There's a chart the operator follows to tailor the load to each wagon and they can't load it in one line, so they'll fill half the wagons, shunt those aside, hook up the rest, part-fill those using the wagon chart and then put the whole train together again. 50 or so tonnes in each wagon, 40 wagons to a train's comp.

The Canadians run 100-tonne wagons and 100-wagon train sets. 2,000 tonnes per delivery to port in East Coast Australia, 10,000 tonnes to port each time in Canada.

Australia has an edge over North American competitors shipping to South-East Asia, but higher onshore handling costs put that at risk.

DAN COOPER: The high cost of execution is eroding our freight advantage into Asia, which has been identified in the recent Rabo report. Our natural freight advantage of $30 is being eroded by the high cost of execution through the supply chain and getting our grain to the customers in South-East Asia.

CHRIS CLARK: Dan Cooper's a farmer who spends plenty of time trying to persuade politicians and others to spend money improving rail lines.

DAN COOPER: Essentially, if you take a long-term look at it, investing in rail gets trucks off roads, reduces the damages to roads and obviously there's a flow-on effect down to the community level.

CHRIS CLARK: As well as running a family farm about five hours' drive west of Sydney, Dan Cooper's chairman of the NSW Farmers Association's Grains Committee.

I caught up with him at harvest time to get an idea of what it costs to send grain from his farm to port. The first bit's easy. The property's only a few kilometres from the local receival site. Wheat's priced by grade. This load's been classified as APW - Australian Premium White. It could go for export or into the domestic market.

CHRIS CLARK: Dan's local receival site's on the main line rail network, so it doesn't have the weight and speed restrictions of a branch line. But they have to juggle loading around other freight trains.

DAN COOPER: Quite often when the trains are loading out of the silo here, the crew has to stand down while the freight train's moving through and sometimes they are a bit generous with their allowances and it's a two-hour wait for the freight train to go through with a crew standing down, which means they can't load the train, and quite often the train leaves half empty - they've not been able to load the train while they were standing down, waiting for the freight train to go through.

CHRIS CLARK: The deregulation of grain exports six years ago was meant to increase competition, and ultimately, the prices paid to growers. Ross Johns farms in Victoria's Wimmera and believes competition is bringing better prices.

ROSS JOHNS: The Wimmera's very lucky in that regard. We've got Glencore at Dooen, we've got Cargill AWB at Dimboola and of course we've got GrainCorp at many sites.

CHRIS CLARK: And how competitive do you think those sites are in the sense of the prices that are on offer to farmers? Is there genuine competition there?

CHRIS CLARK: This GrainCorp site at Warracknabeal is where most of Ross John's grain used to go. It was the closest. But since new players entered the market, he's happy to truck his grain a bit further to this site, owned by the US giant Cargill. And Ross Johns says the reason he brings most of his grain here now is price.

ROSS JOHNS: In this instance in the Wimmera, the site at Dimboola could offer $6 to $8, maybe $10 per tonne, up to as much as $15 per tonne on other sites just based on more efficient supply chain to the marketplace.

CHRIS CLARK: The Dimboola site's on a main line, without the speed and weight restrictions of a branch line. They can load 40-plus wagons in one line, there's no splitting and no stopping as other traffic whizzes by on the main line bound for port.

Ross Johns believes larger, more efficient sites are the future.

ROSS JOHNS: I'd like to think that we can get receival sites to a level that is globally competitive. In South Australia and Western Australia there's sites there that would receive 400,000 to 500,000 tonnes of grain. In Victoria, probably we've got a lot of smaller sites that in the past have been very good, but today, looking forward, those smaller sites, it's difficult to make them run efficiently.

ALAN WINNEY: We've got a country-based infrastructure in particular that was built in the days of horse and cart and the country storage sites were driving distance for the horse. So, a lot of those small country sites do need to close. I mean, you really need 100,000 tonne throughput country facility to be efficient and competitive.

CHRIS CLARK: If ADM had bought GrainCorp, that's probably what would have happened: fewer but bigger up-country storages. It's what'll happen with GrainCorp too, there just won't be as much money for reinvestment. GrainCorp dominates up-country storage in the east - 280 odd sites, but around 80 per cent of the grain it handles goes through just 100 sites.

DON TAYLOR: Firstly we've got to upgrade sites to make sure that they are efficient and can handle their things, and together with that, we'll then look at sites that will no longer operate. By and large the growers actually choose the sites that operate.

DAN COOPER: If growers are going to have to cart further, then they need to be able to get a better freight rate at the site, you know, essentially a better price for their grain. Growers'll just move away from growing grains, especially on those western branch lines because it'll just become more exorbitant or expensive than what it is now.

CHRIS CLARK: In theory, a market-based supply chain increases competition among buyers and the prices on offer to growers.

ROSS JOHNS: A more efficient supply chain should put a pricing incentive in place that means growers will choose the pathway of the future. The historical way grain has been run that's been run maybe not necessarily on a cost plus for some of these smaller sites. They were run on a service opportunity for growers. And maybe that's a bit of adjustment that had to happen in the industry.

DON TAYLOR: Obviously for the farmers that live close to a depot that's closed, that's going to be difficult for them, but by and large, farmers, once they put it on a truck, if they're running a fleet of trucks, it's - the additional distance hopefully will be compensated by a lower rail freight and better service offering at the other depots. So it should be a win-win if we can get it right.

CHRIS CLARK: It might take years for big infrastructure efficiencies to pay off in better prices to growers and there's no guarantee that'll happen.

Tim Glass spent years trading grain and these days runs his own farm and advises others how to market grain.

TIM GLASS, CWF AGRICULTURAL SERVICES: If Australian farmers want to participate in efficiencies in the supply chain, then the only way they can do that is by investing in some part of that supply chain, whether that be through a truck or a silo or a co-op, pooling and maximising those efficiencies, that is the only short-term way that Australian farmers are going to see a benefit of that supply chain improving.

CHRIS CLARK: And how they do that might depend on where they are on the East Coast.

TIM GLASS: In the north with the larger-scale farming, the big broadacre farms, they probably have the economies of scale to have their own on-farm storage and work with companies to move that grain direct from farm to port. But if you move into the southern areas, farms are smaller and you may see opportunities for farmers to group together in, say, a 50 k' radius and build co-op-type arrangements where they pool their resources to try and participate in some of the same efficiencies the larger farmers in the north can achieve.

CHRIS CLARK: That's the sort of innovation that was pretty much forced on growers around Moulamein in New South Wales more than a decade ago when their local silo closed and they lost their rail link. So they formed the Moulamein Grain Co-operative. Rice is the big crop round here, but most growers will follow up with a cereal. Peter Kaylock's the co-op chairman.

PETER KAYLOCK, MOULAMEIN GRAIN CO-OPERATIVE: It happened within a couple of months and we put the site up; we thought we were going to take 10,000 tonne; we took 40,000 tonne, which just blew us away.

CHRIS CLARK: Now they've got 100,000 tonnes of storage capacity and they also manage sites for other farm co-ops. They're minnows in the world of storage and handling, but size isn't everything.

PETER KAYLOCK: We're much more efficient, I think, because we run a smaller operation, our overheads are a lot lower, we can market certain types of grain, go into the market with a 4,000-tonne line of - with the one type of grain, so we can perhaps get a little bit better price for our growers.

CHRIS CLARK: The co-op pays dividends back to growers, but they still have to compete on a commercial basis.

TONY BELLINGER, MOULAMEIN GRAIN CO-OPERATIVE: Our cash prices have to be competitive with the opposition or we won't get any grain, so we've got a competitive group of buyers who allocate cash pricing every day.

CHRIS CLARK: The pattern of investment since deregulation offers a guide to the future of Australia's export supply chain. This is the Port of Melbourne, owned and run by Emerald Grain, who in turn are now wholly-owned by Sumitomo of Japan. Emerald has a network of up-country storages that feed the port via their own leased trains and road transport.

ALAN WINNEY: The way the market's changed in Australia, I mean, the access issue is a key issue. So, exporters are dealing with a competitor in a lot of cases now. The storage and handling companies have merged with the marketing companies.

CHRIS CLARK: Alan Winney founded Emerald and has just stepped down as chairman.

ALAN WINNEY: If you want to market grain internationally, you need to have some control over your own supply chains. So Emerald chose to buy the port in Melbourne and to buy the country storage to ensure that it could control the timing of when it was going to buy and sell grain.

CHRIS CLARK: For similar reasons, another one of the big global players, Bunge, is spending about $40 million establishing a new grain terminal at Bunbury in Western Australia. It's only a couple of hours south of CBH's Kwinana port. CBH ships nearly all the export grain out of the west and it runs a rail network. Bunge have been buying port capacity from CBH, but they've now decided they want control of their own destiny.

CHRIS AUCOTE, BUNGE AUSTRALIA: We really looked at either going through the existing infrastructure, as you say, through CBH, but certainly we had some issues in gaining access to that infrastructure over the last few years and so the option we looked at was investment and building more capacity, which we think is needed for the Australian market.

CHRIS CLARK: This isn't a port from scratch, they'll use an existing woodchip loader and they're building their own storage and conveyor. Keeping the capital costs down is important because grain will come here by road. It's more expensive than rail.

CHRIS AUCOTE: Our aim was to really reduce the amount of capital expenditure that we were making on the project to make us competitive with the existing market that's there. I think the other thing is that Bunbury's in quite a unique location really and a lot of the grain is really between 200 to 300 kilometres from port. Our view is that road on those shorter hauls is quite competitive versus rail.

CHRIS CLARK: Backloading trucks with fertiliser should cut the cost of bringing grain in by road and perhaps farmers will innovate too.

CHRIS AUCOTE: We think farmers looking at whether it's on-farm storage or some sort of co-op-type storage, if farmers want to do that together, and then by leveraging the freight options with existing lime and fertiliser that's already going back out into the grain belt, we think that, yes, we can offer farmers a fairly - a competitive price with the existing infrastructure that's already there.

CHRIS CLARK: There's also investment in new grain ports on the East Coast. This is the Newcastle Agri Terminal, funded by a consortium that includes CBH, the farmers' co-op from the west.

Up on the gantry, above the conveyors and elevators, you can look out across the Port of Newcastle and see one of GrainCorp's seven East Coast ports just a few hundred metres away.

If GrainCorp's such a powerful monopoly, why build a new port right next door?

JOCK CARTER, NEWCASTLE AGRI TERMINAL: People say there's already too much capacity. The reality is it's a question of when you need that capacity and how much capacity you need.

CHRIS CLARK: Grain exports are usually crammed into the months just after harvest, where everyone's trying to book slots on the shipping stem.

JOCK CARTER: If you look at Victoria, South Australia, Western Australia, the stem for the first six months in nearly all the ports has been booked out and there's actually been almost a shortage of capacity.

CHRIS CLARK: It's more than that though. These ports are built to last decades, but times change; technology improves. GrainCorp's Newcastle terminal dates back as a far as the mid-'30s. It's got well over twice the storage capacity of its new competitor. At both sites, the bulk of the grain comes in by rail, but GrainCorp has water on two sides. They don't have room to unload a 40-wagon train in one go.

DON TAYLOR, GRAINCORP CHAIRMAN: Do a 40-car train, this siding only handles 10 cars, so we have to break it up into four bits. But each terminal that we have has a different configuration, so while this terminal has that inefficiency, other terminals don't. If you could unload a train without it stopping, it would just drive straight through. That would obviously be more efficient. But each terminal has its own restrictions.

CHRIS CLARK: They can split and unload these trains pretty quickly, but if you were designing it again, you'd do it differently, as their competitors have done.

At Jock Carter's terminal, there's enough room to do 40 wagons in one line. They could do 80 and then split them with locos in the middle.

JOCK CARTER: Our rail facility, for example, here, the line continues down and then moves around through a balloon loop, so you don't have to shunt the train and split the train up, which means when you're discharging, it's a significantly faster turnaround. That becomes very important in terms of the overall network.

CHRIS CLARK: This challenge to GrainCorp's dominance comes as management struggles with life after the unsuccessful ADM offer.

Can you explain why ADM were unable to persuade the Treasurer to approve their takeover offer?

DON TAYLOR: No, you better ask the Treasurer that and the farm groups what the issue was. No. It's sort of - from a business point of view, it didn't make any sense.

CHRIS CLARK: Dan Cooper campaigned hard against the ADM offer unless there were very strict rules in place to govern how ADM would run GrainCorp. Money for rail was on offer, but farmers were worried an ADM GrainCorp would choke competition at the ports.

What's the difference between GrainCorp having a monopoly on East Coast ports and ADM having a monopoly on East Coast ports?

DAN COOPER: I think without any conditions around the sale, GrainCorp, you know, if issues arise around competition, it would be easy to address those issues domestically, if ADM owned the monopoly, they would cry sovereign risk if governments tried to move the goalposts after the sale went ahead. So, you know, I think that's probably the biggest issue around that monopoly ownership.

ALAN WINNEY: I suspect that GrainCorp is still a takeover target. Maybe not by ADM, but I think there are other people who are interested and the Government may decide that other parties are more suitable buyers or may decide over time that ADM is an acceptable buyer. But I think GrainCorp's still very much on the table as a takeover target.

DAN COOPER: I think the devil'd be in the detail. Growers'd want to know how they were going to benefit from a change of ownership and that's essentially what growers' concerns were at the beginning of the ADM takeover was: how does this sale put dollars in growers' pockets? And that's what it's about.

CHRIS CLARK: No-one argues the industry doesn't need investment.

DAN COOPER: We're some of the most productive and innovative farmers in the world, but post the farm gate to the customer, we're Third World in terms of the supply chains. So, if we're going to take hold of these opportunities in Asia, then we need serious amounts of capital invested in the supply chain and the competition to come with it.

TIM GLASS: The limited amount of capital now available to maintain infrastructure up-country is probably disappointing. However, it probably shows Australian farmers that for them to get any economies of scale through efficiencies of faster grain movements to port, there's going to need to be some kind of investment and that may have to be foreign investment.

CHRIS CLARK: The future of GrainCorp and the focus on investment have been issues since deregulation. Who's going to pay to upgrade rail lines? How will the ports be regulated? The game's changed, but the players can't agree on the rules.

DON TAYLOR: Yes, look, it's become very complex and actually one of the issues that I think the industry's going to have to address is the complexity of the industry. Especially in the east, where we have multiple exporters through multiple ports, multiple logistics providers, multiple train providers. So we've got to look as an industry about rationalising and working together to make it less complex. Take complexity out of the business, you actually take some costs out of the business and that's what we've got to focus on.

CHRIS CLARK: The bigger picture is Australia's future as a grain exporter. We were the fourth largest wheat exporter last year, but the competition's fierce.

ROSS JOHNS: To get a low cost supply chain, we probably need to look to the future about how we want to compete in the world, what the scale of those sites are, the efficiency of the rail and the transport network. We want to be better than the Canadians, we want to be better than the North Americans and particularly better than the growing market or supply base in the Ukraine and Kazakhstan.

CHRIS CLARK: It's the sort of challenge that comes along once in a generation and can determine the future for generations to come.